Citigroup’s CEO Vikram Pandit said the bank still has capacity to return more capital to shareholders and will seek clearance for a “meaningful” payout after the Federal Reserve rejected an initial plan, the wires report. The Fed allowed f\JPMorgan Chase and Wells Fargo to increase their payouts.

Despite this failure to payout more to shareholders, Vikram S. Pandit could see a total of US$53 million in compensation for 2011, from his yearly pay combined with a multi-year retention package, Bloomberg News reports, citing filings and an analyst’s estimate. Could remind TOC and TRE readers or their usual writers of the transport and HDB ministers who “retired” after failing to anticipate the problems that increased FTs would cause in their portfolios and of “50-year flood” Yacoob who got moved to MICA after Orchard Rd was hit by two such floods in two months in 2010.

Four US financial institutions, including Citigroup, have failed stress tests designed to show they could withstand a financial shock. The Federal Reserve said Citi, SunTrust, Ally Financial and MetLife failed to show they have enough capital to survive another serious downturn.

Citigroup is the third-largest US bank. The majority of the 19 tested passed.

All those tested are in a much stronger position than they were after the 2008 financial crisis, the Fed added.The Fed tested the banks’ ability to withstand a similar crisis that triggered a rise in unemployment to 13%, a 50% fall in share prices and a 21% drop in house prices. Their strength is assessed by the amount of “buffer” best-quality assets, known as Tier 1 capital, they would hold if such conditions occurred. The regulator said Citigroup had a Tier 1 capital ratio of 4.9%.

Reminder, GIC still has a substantial stake in Citi. SIGH.

Update at 6.15pm on 14 March 2012: Despite failing the test, Vikram S. Pandit, Citigroup’s chief executive, could see a total of US$53 million in compensation for 2011, from his yearly pay combined with a multi-year retention package, Bloomberg News reports, citing filings and an analyst’s estimate.

They owned significant stakes of the four (BoA, Citigroup, UBS and Barclays) of the 10 biggest dogs that had fleas on their fleas between 2002 and 2012. To be fair, the big stakes were bought in late 2007 or early 2008. GIC and Temasek each has two dogs to their shame. GIC still owns stakes in UBS and Citigroup. Temasek cut its losses at the nadir of the financial crisis of 2007-2009, in early 2009, allowing hedgies and Arabs to make money on BoA and Barclays.

(Remember how the constructive, nation-building local media were trumpeting the purchases as indication that our SWFs were “the greatest”. Well they were “the greatest”: the greatest mugs. Funny our media never told us that.)

Hope GIC’s big stakes in Glencore and Bunge (both commodities traders, the former in metals, the latter in agricultural products) don’t go the way of UBS and Citigroup (big banks).

GIC now has over 5% of Bunge.

Via shares and convertible bonds that convert into Glencore shares, it also has a significant stake in Glencore. GIC has been doing some financial engineering to reduce its cost of Glencore shares, which I assume it bot at the IPO. The price has fallen 18% since then. As to its convertible bonds, it is getting a good interest rate of 5% but the equity value of the bond is 17% down, I calculated.

GIC recently raised its stake in Xstrata by 20% and trimmed its holding in Glencore International after the companies said they planned to combine. GIC has increased its Xstrata stake to 29.05 million shares from 24.1 million shares since Feb 8, the day after Glencore offered to acquire the shares in Xstrata it doesn’t already own for US$37.6 billion, data compiled by Bloomberg show. GIC cut its Glencore stake by 21% t to 33.2 million shares.

GIC is a one of three members of a consortium that won a bid for BAA, valuing it at £10.3bn in June 2006. The investment went almost immediately wrong. Fortunately, GIC’s initial stake stake was a peanutty 5-10%. The exact %age has never been disclosed.

Still it is no surprise that Reuters reports that GIC “is selling US$750 million of private equity and other funds it no longer wants to invest in, and will redeploy the money to other better-performing managers, according to sources familiar with the matter”.

To be fair,”sovereign wealth funds and pension funds are pruning their exposure to alterative assets such as private equity amid the economic downturn”. Taz the problem when one tries to be hip and sassy.

Readers will know by now that UBS, where GIC is a major long-term (and suffering) investor, is planning to reduce the scale of its investment banking operations, the source of its on-going problems since 2007.

But they may not know “What they are trying to do has never been done before,” Christopher Wheeler, an analyst at Mediobanca, said. “They want to shrink the investment bank by choice, which means unwinding positions without loss and running down their books while keeping the morale among staff, and it’s unclear who’s running the shop.”

And don’t be fooled by its latest results. Despite being hit by a 1.85bn-franc loss from deals made by an alleged rogue trader, it just made a better-than-expected third-quarter net profit of 1bn Swiss francs (US$1.1bn).

The loss was almost entirely offset by a 1.77bn-franc accounting gain that came from changes to the value of the bank’s own debt. One of these days, I’ll blog on the Alice-in-Wonderland accounting that allows this type of gain to materialise. According to the FT’s Lex, four-fifths of the US$16bn net profits in the latest announced results of (BoA, Citi, JPMorgan, Morgan Stanley and Goldman Sachs came from using used the same accounting treatment of the banks’ own debts.

I read in Monday’s Todaythat despite being the largest single shareholder in UBS (6.4%), GIC was not consulted on the management change when the CEO resigned. He resigned over differences in strategy and corporate governance issues.

Yesterday evening Reuters reported that “GIC supported former chief executive Oswald Gruebel’s strategic plan for the bank and believed he could have stayed on to manage it through the latest crisis, a source with direct knowledge of the matter said on Tuesday … GIC’s support of Mr Gruebel until the very end also shows that while his leaving may have satisfied some shareholders, it hardly reassured the Singapore fund, which owns 6.4 per cent of the bank.” (Sorry I don’t have the link as I got the report via BT Online.)

Given that GIC is the single largest shareholder and supported his plan, and the board was meeting in S’pore, GIC should have been consulted. Would any company where Warren Buffett is the single largest shareholder dare sack a CEO that had his backing? Unlikely.

Time for GIC to gain some respect by flexing its financial muscles. No more Ang Moh Tua Kee pls.

No, this is not a rant abt GIC’s performance or how it misleads the public abt its performance. It’s about how its inability or unwillingness to communicate with us, the public, can be self-defeating, leading to more questions being asked, especially on why it keeps relying on spin rather than facts, as illustrated by this media statement from GIC.

In a statement to the media last week, the Ministry of Finance said, How well GIC performs is not a secret. Its mandate is to preserve and enhance the international purchasing power of the reserves over the long term. Hence, it publishes its 20-year annualised real rate of return.

GIC also reports its returns over five- and 10-year periods as intermediate measures of its performance.

GIC’s Performance as per annual report

Period

Government’s nominal rates of return in US$ for period ended 31 March 2011 (%)

5-Year

6.3

10-Year

7.4

20-Year

7.2

Well its performance might be as well be secret.

The problem is that these performance numbers raise questions on their methodolgy, to which answers are not available. I will only raise one issue, but this one issue will take acres of space. TOC has raised other less technical issues.

My grumble is that there is no disclosure on whether the functional currency is US$ or S$. By “functional currency”, an accountant means the currency in which the accouts are prepared. We only know that the returns are presented in US$, the presentational currency. This does not imply that the functional currency is US$.

If the accounting of the funds under mgt are done in S$, the performance results would have included the exchange loss arising from the US$ depreciation against the S$. So if its functional currency is S$, but its presentation currency is US$, then all exchange losses arising from US$ depreciation against the S$ will have been taken into account.

If however if the functional currency is US$, then its US$ denominated assets and US$ investment income will not be impacted by US$/S$ movements. And any analysis would have to take US$ depreciation into account.

The differences can be great. (Please click “Read more” to read the article in full, if you are reading from the Home page. There is a necessarily long-winded example to illustrate what I’m trying to say.) Read the rest of this entry »

I am pleased to read in today’s FT that GIC has in a statement (can’t find it to link to) expressed its concern to UBS abt the latest loss of US$2.3bn.

At least, it is concerned it bought us 6.4% in a dog with fleas.

Why these comments by me?

Yesterday I was appalled by this media statement to Today. GIC came across as saying, “So what if GIC lost money in UBS, it made money elsewhere, and that’s the important thing.” This was hedgie gunslinger talk, not that of a responsible fund manager.

True. performance should be judged on the performance of the entire portfolio, not its individual holdings. But

– where a bigger than normal bet is made (GIC usually buys less than 5% of an investee),

– in a special deal for GIC alone,

– where it trumpeted very loudly its prowess at the time when the deal was made,

such such public insouciance by Jennifer Lewis Head, Corporate Affairs and Communications, is unacceptable. Especially as GIC manages our money. (BTW, yes, she helped Tony Tan in the debacle of a campaign in her personal capacity.)

The investment bank of UBS “now looks as likely to die as it is to live,” writes Felix Salmon of Reuters. Selling or spinning off the unit don’t look like great options in the current environment, he says.

So there goes GIC thesis of a unique franchise combining wealth mgt and investment banking.

Remember, GIC has a 6.4% interest in this dog with fleas and GIC is down around S$10bn as of Thursday last week. Since then the loss has reduced to S$9.75bn. Even Mrs Goh Chok Tong would not call this sum “peanuts”.

Given the latest problem at UBS, a US$2bn “unauthorized” loss (anyone ever heard of an “authorized” loss?”, and Tony Tan’s boasting of his expertise, PM should ask him for advice on what to do with this long-term investment?

Too bad, the president can only give advice and be a security guard. In investment management and investment banking, there is a school of thought that believes that those who created the shit, should clean up the mess themselves.

Update at 4.15pm on 16 September 2011

Local paper reported that the book loss on GIC’s 6.4% in UBS is S$10bn based on yesterday’s closing price of UBS shares.

China, the world’s biggest exporter and second biggest economy, is still booming. Its GDP is expanding at about 9% a year and since the 2008 financial crisis, China has helped keep the global economyfrom falling in a recession. But, as the BBC’s Damian Grammaticas reports, China may not be immune if there is a new slowdown in the US and Europe.

Paulson & Co, the US hedge fund, has won a US court victory against GIC over control of a group of luxury hotels that brings it closer to making potential windfall profits.

GIC has been trying to win control of the hotels from a group led by Paulson & Co since early this year. These hotels were originally part of the holdings of troubled Morgan Stanley real estate funds –

The FT reports, In a little noticed judgment at the end of June, the court extended for another four months the Paulson group’s exclusive rights to file a bankruptcy plan.

GIC had argued that the Paulson group would manipulate the bankruptcy process for its own gain. According to court documents, GIC said the Paulson group was delaying resolution to enable it to “bet on a significant upswing in the commercial real estate market”.

Note SWFs are reluctant to court the publicity that goes with litigation.

Note this hedgie made billions buying BoA when Temask was selling its “30-yr” investment.

Less than 12 hours later (albeit overnight), he came out to disagree with the minister saying, “I do not agree with his view that the President cannot speak about anything else without the approval of the Government. I find the Law Minister’s interpretation to be too narrow. It seemed to give the President less freedom of speech than an ordinary citizen of Singapore.” http://tankinlian.blogspot.com/2011/08/statement-from-tan-kin-lian-can.html

Shouldn’t he have said this in the first place?

And as to Tan Cheng Bock, if he was good enough for one Lee Kuan Yew to ask him to serve as a PAP MP when being asked to serve as a PAP MP was seen by the public as an honour unlike today (when the likes of Kate Spade Tin, Foo, Wee Kiak and Puthu can become PAP MPs) , and for the government of the day (which the PM was a part) to ask him to head a feedback unit, waz the problem of having him as a security guard president?

And as the law minister said, the PM can ignore his advice. Say if and when he asks the PM to think of the people when making policy decisions.

Using BT’s numbers that appeared in BT today, I calculated that GIC has a book loss of S$8.4bn on UBS, a profit of S$1.9bn on Citi and a paper profit of S$1.3bn. So this adventure in distress investing has not paid off yet. The net book loss is S$5.2bn.

GIC owns 245.48 million UBS shares, or a stake of 6.41 per cent in the bank, UBS’s latest annual report shows. That stake would be worth some 3.41 billion francs, at UBS’s share price of 13.88 francs at 9.30pm Singapore time yesterday. Even after including the 1.98 billion in coupon payments that GIC received in the first two years of its investment in UBS, its paper loss is about 5.6 billion francs*, or 51 per cent of the original 11 billion francs.

By contrast, its current stake in Citi is showing a large paper gain.

After selling half its original stake in Citi for a profit of US$1.6 billion** in September 2009, GIC still owns 3.86 per cent of the bank’s ordinary equity – or about 112.095 million shares.

The average cost of those shares was US$29.50 each – after adjusting for a reverse split of Citi shares in May that merged every 10 of its shares into one share – based on information provided by GIC in September 2009.

At yesterday’s opening price of US$39.69 for Citi shares in New York, the shares would be worth about US$4.45 billion, compared to the US$3.31 billion cost of acquiring them, giving GIC a paper profit of US$1.14 billion***, or some 34 per cent.

President S R Nathan said recently that the recent recession, in which the government for the first time sought his office’s approval to draw on reserves, has validated the need for Singapore to have strong national reserves.

He must be talking of the S$4.9bn that was used to fund the government budget in 2009 and which has since been returned.

Juz taking into account the monies managed by GIC, and Temasek’s funds, our reserves then were at least S$470.3bn. This means that only 1% were used to fund the recession budget.

Do we need such massive reserves when we draw-down so little, given that the reserves are not the result of nature’s bounty but of the people’s savings.

As minister Mah has again talked rubbish, this time that cheaper HDB flats will raid our reserves, I tot I should paint a mental picture of how our reserves, CPF and SWFs are linked, and in the process show that he is talking rubbish when he talks of our reserves being raided, if HDB flats’ selling prices are lowered.

Visualise a big glass tank. Above it are three pipes, below it is one pipe. When the taps are open, water flows in from the pipes on top and water flows out from the pipe below.

The water flowing from the pipes at the top represent the income that goes into the Consolidated Fund (tank). From one pipe would flow income from all the taxes (income tax, VAT, property etc), service charges and fines levied. From another another pipe would flow the permitted returns from our reserves. From the final pipe would flow the money from government borrowings*. The money from the special CPF bonds would be part of the flow from this pipe. The water flowing out from the pipe below represents government spending.

There is no water in the tank when the outflow (expenditure) exceeds the inflow.

But there will be water in the tank if the inflow exceeds the outflow.

Now imagine a ballon hovering just above the water. It has a hose syphoning out water from the tank. The ballon is the reserves taking surplus $ from the Consolidated Account. The ballon has another hose sucking air into the ballon: this represents the proceeds of “sale of state land”. This shows that minister Mah is wrong in his assertion that cheaper HDB flats raid the reserves. All that happens is that less goes into the reserves. Is this a bad thing. I doubt it as we got lots of money in our reserves, Temasek’s 2009 losses notwithstanding. (Our SWFs managing only a part of our reserves have 179.5% more in assets than S’pore’s 2009 estimated GDP. I calculated this in November 2010.)

The ballon keeps growing while another hose pumps some of the water into the reserves pipe which flows into the tank.

And where is GIC and Temasek? They and the central bank manage what is in the ballon.

When any government or company or person borrows, the money borrowed becomes the income of the borrower. So when the government borrows money from the CPF by using the special bonds, the money borrowed becomes part of government income.

The interest payments on the special CPF bonds and other borrowings are part of government expenditure.

In Dec 2009, GIC and a few other investors (including BlackRock, Fidelity and a Rothschild) invested US$2.3bn in the convertible bonds of a then private Glencore. The convertibles put a value of US$35bn on Glencore, a trading co with a 34.5% in mining co ,Xstrata

Analysts now put the value of soon to be listed Glencore at between US$55-70bn.

If Glencore lists at the expected US$60bn, then the US42.3bn issue of convertible bonds will be worth US$4.3bn in Glencore shares.

More than 50% of its profits come from emerging markets juz when emerging markets are losing their attractiveness to global investors.

Given Cit’s record of losing serious money by jumping into markets late (think sub-prime, and lending to finance LBOs, US property (in the 80s) and Latin America (in the 80s too), S,poreans should be concerned., given GIC’s 5%(?) odd stake in Citi,

The Fed notified financial institutions that passed a second round of stress tests that they can begin returning money to their shareholders, The results are confidential but already some US banks are saying they will raise dividends this year. Among them are Citi rivals JPMorgan and Wells Fargo. Citi says that only in 2012, will it consider raising its dividends, It got a lousy rating?

Now I’m not saying that our SWFs should play that rough with the investment banks — there will be adverse consequences for Garuda when it tries to raise more money and the Indonesian authorities when they try to sell other companies — but our SWFs should try to keep the premiums to around 5%. It’s hard, but they shld try.

Our MSM focused on the fact that last yr was Citi’s first profitable yr since 2007. But it didn’t say much abt fact that Citi’s latest quarterly profits disappointed the mkt because they are due to a tax credit and a transfer from its reserves, nothing to do improving operations.

Could it be because GIC stills owns a lot of it? And with a GE coming, the “constructive, nation building” media don’t want to remind us that returns for shareholders are not going to be great for some time?

Global Logistics Properties has replied to a hack’s rant on why it should have disclosed GLP’s non-compete agreement with ProLogis in China and Japan in its prospectus. The GIC-linked company, which listed on SGX in October continues to contend that the “existence of the non-competition arrangement between the company and ProLogis is not material, and continues to be non-material to the ongoing business of the company”. The quote is from its reply to BT who first exposed this agreement.

I won’t go into the legal issues involved except to say but I find the reply inconsistent. BTW the links to the reply and rant may go walkabout in a few days’ time.

But what will SGX do? If it does nothing (putting the onus on the central bank: MAS approve prospectus leh), or investigates and then clears GLP, it will fuel Ozzies suspicions of the SGX takeover of ASX for two reasons. Read the rest of this entry »

When read I this “prudence and discipline” article last Friday* reporting a speech on S’por’e welfare system (past, present and future) by the PM, I was reminded of the conversation between Alice and the White Queen in Lewis Carroll’s book Through the Looking Glass and What Alice Found There”.

In the book the White Queen offers Alice “jam every other day” to work for her: “The rule is, jam to-morrow and jam yesterday – but never jam today … It’s jam every OTHER day: to-day isn’t any OTHER day, you know.

“[J]am to-morrow and jam yesterday – but never jam today” has since then become an expression for a never-fulfilled promise, which is what many think the promise to help the poor has become.

What annoyed me was that the PM doesn’t understand the issue: saying we couldn’t afford European style welfarism. Trouble is no-one sensible is asking for this, certainly not the opposition parties or the do-gooders.

The ex-head of the civil service and now chairman of the Public Service Commission showed he “got it” when he said at a recent speech in the US to S’pore scholars: “More and more citizens, especially younger Singaporeans, agonize over the fact that there are still poor people in wealthy Singapore.”

The issue is the smallish amount of welfare payments relative to the Budget. Take Workfare the govmin’s flagship programme. It has the right idea but is too ungenerous.

The PM in November said abt Workfare: “[A] total of $1.65 billion in the last five years, or $400 million a year, to help 400,000 low-income workers”. The Finance Minister said in February this year that the enhanced Workfare scheme will cost the government S$100 million annually. So the spending on Workfare is now S$500m or 1.5% of the operating expenses in the latest Budget. Still peanuts. And yes I know that 1.65bn divided by 5, doesn’t equal 400m. Taz why I quoted the exact words.

And if the govmin is concerned that increased annual payments to the poor will lead to moral degeneration and the destruction of its “Work will make you free” philosophy (seriously though, there is the very human issue of rising expectations and politicians pandering to the voters), why not try Kaushik Basu’s solution? The Cornell University professor, and chief economic adviser to India’s finance ministry, says it is not enough that the income of the bottom 20% rise at the same percentage rate as the average. Instead, they should get an equal absolute share of the income the economy.

This would mean only a one-off transfer of S$3.1 billion to the poorest 20% of S’poreans. Less than Temasek’s realised loss on Merrill Lynch. Temasek could have lost as much as US$4.6bn (in 2009 March this would have been S$7bn) on Merrill Lynch. (BTW, March 2009 was not gd for Temasek. The much smaller loss on Barclays (800m sterling?, was then worth abt S$ 1.7bn ).

Mr Honohan [the Irish Central Bank governor] … points out that Ireland’s official GDP and unit labour cost statistics have consisently overstated the size of the Irish economy and its productivity respectively – largely because that economy is so dependent on multinationals with headquarters in the Republic, whose high profits acrrue to the overseas owners of those multinationals rather than to Irish residents.

That overstatement of the magnitude of the output of Irish residents, which in some real sense is attributable to those residents, could be as much as quarter, he says. Excerpt from Robert Preston’s blog on BBC Online.

Here, where the economy too is dependent on MNCs, this means that the economy is not as big as the stats imply. And that productivity is even worse than the already lousy numbers show*. The latter isn’t juz Reform Party spin. Remember there is yet another government campaign to raise productivity going on.

Perhaps the fact that the economy is smaller than the stats imply is why the government seems obsessed by the need to build up the reserves. We will (not might) need the rainy-day money, one day. Question of “when” not “if”.

Did you know that when the government sells state land to property developers, the money flows into the reserves (which are managed by our SWFs) and not into the Consolidated Fund like other government income? This is uniquely S’porean. Other countries credit land sales to income. The government’s rationale is that as state land is an asset, sale proceeds should not be credited to income but to capital (reserves). Makes sense, but that’s not how other governments account for land sales: even HK, and no-one can say that HK is badly run or profligate.

So when HDB “buys” land from the government it is adding to the reserves. As it and government claim that the price an apartment is sold does not reflect this price, they claim HDB makes a loss. But whatever it is (I leave it to others to dispute this claim), the reserves are increased.

So in addition to the surpluses (generated by thriftiness or meanness according to who is talking) and (indirectly via a circuitous route) our CPF monies https://atans1.wordpress.com/2010/11/02/how-we-fund-our-swfs/, sales of state land also contribute to the reserves that GIC, Temasek and the central bank manage.

There was one financial year ending March 2008 ( I think), where the government injected abt S$10 billion into Temasek. This sum was more or less equal to the amount that the government took in property sales for that year. Easy come, easy go as in the following yr Temasek could have lost as much as US$4.6bn (in 2009 March this would have been S$7bn) on Merrill Lynch. And there was the much smaller loss on Barclays (800m sterling?, then worth abt 1.7bn S$). Err not much change left over from injection: only S$1.3bn, “peanuts” as Mrs GCT might have put it, except she didn’t.

So this combination of surpluses, CPF money (indirectly via a circuitous route), and state land sale proceeds, have resulted in our SWFs having 179.5% more in assets than S’pore’s 2009 estimated GDP.

The Norwegian’s much larger fund (US$471bn) is only 23% more than Norway’s GDP. Abu Dhabi’s fund (at US$627bn) is 627% of its GDP. For those interested, I used FT’s US$248bn for GIC and US$133bn for Temasek. As to GDP numbers, I used CIA Fact Book as reference. (BTW, I’ve not taken into account the amt of foreign reserves that MAS manages because I could be double counting if I do. For the record, MAS says its reserves as at end 2009 are US$188bn).

So we got plenty of $ to make housing more affordable*. And there is no need to change constitution, or cut other expenditure. Juz change the accounting rules on land sales.

Once upon a time, India deemed GIC and Temasek to be one entity and there was a 10% on the joint holdings of both in Indian companies. The Comprehensive Economic Co-operation Agreement (CECA) which was signed in 2005 provided that Temasek and GIC were to be recognised as separate entities, i.e. each is entitled to each own up to a 10% stake in a company.

There is a report in an Indian newspaper that the Securities and Exchange Board of India (SEBI) has ordered that both Temasek and GIC could only own up to a combined 15% stake in a company, or takeover rules would be triggered.

Switzerland has proposed new rules that will make UBS less profitable. As GIC is 45% underwater on its UBS investment, this means it may take longer for GIC to breakeven on this dog with fleas. MM’s talk of 30 years may be an understatement. And he was talking of profit not breakeven.

And GIC may have to invest more in UBS if it decides that it wants to maintain its present holding. These rules means UBS will have to raise capital.

Finance 101: the more capital is required to hold, the less funds it has to make money because capital has to be invested in very safe assets, normally government bonds of the supervising country.

UBS and Credit Suisse will have to accumulate billions of francs in extra capital under proposals from a Swiss expert group on the role of banks deemed “too big to fail.”

The recommendations will oblige Switzerland’s two top banks to maintain supplementary national capital standards far in excess of the Basel III rules agreed by international regulators last month. note

The proposals will oblige the banks to hold total capital equivalent to 19 per cent of the risk weighted assets on their balance sheets, based on their current figures.

Under the proposals, the first 10 per cent of capital will have to be strictly defined “common equity” – meaning capital of the highest quality. The requirement is three percentage points more than the 7 per cent proposed under Basel III for banks to pay bonuses. FT reports.

If GIC and our “constructive”, “nation building” media treat us S’poreans as morons, as this piece (albeit too rhetorical for my taste) points out, I don’t see why I should try to analyse its portfolio performance. Disrespect begets disrespect.

The GIC report doesn’t give the data to make a meaningful analysis. Now I am not asking for more transparency, there could be gd national security grounds for being opaque. True Norway’s SWF is very transparent but Norway doesn’t have our neighbours: one with a record of aggression against its citizens, and other countries, and two jealous abt S’pore’s performance.

But MSM, GIC stop spinning that GIC’s performance can be analysed from the data provided.

The unrealised loss is S$5.5bn or 28.8% of the total investment in both banks. (S$18.1bn). This can fund slightly more than 13 of VB’s Kiddie Games and buy the poor (he berates) all the hawker and restaurant meals (sharks’ fin combs included) they will ever.

At last Friday’s closing price of US$3.90, Citi’s shares would be worth about US$4.4 bn, compared to the US$3.3 bn (S$4.3bn) cost. This gives GIC a paper profit of US$1.1 billion (S$1.5bn). Gd job GIC. And I didn’t take into account the profit it made selling part of its stake.

But GIC’s investment of 11 bn Swiss francs (originally convertible notes issued by UBS) or S$14.8bn is showing an unrealised loss of 4.9 bn francs (S$6.6 bn) based on last Friday’s closing price, even taking into the 2 bn francs it received in interest.

GIC now owns 3.8% of Citi’s common stock and 6.4% of UBS’s common stock, GIC said at a briefing on its latest annual report on Tuesday.

Some analysts and accounting experts (among the latter Lynn Turner), a former chief accountant at the Securities and Exchange Commission, say Citi must set aside funds to cover US$50bn of deferred taxes.

These assets are important to Citi. At the end of the second quarter, deferred tax assets made up more than a third of Citi’s tangible equity. So if he had to set aside funds, this would reduce its capitalratios and weaken its balance sheet.

To avoid setting aside funds, Citi has to be confident it will earn US$99bn in taxable income during the next two decades. It says it can.

However as its pre-tax losses in 2008 and 2009 topped US$60bn, these critics ask why it should be trusted. They have a point, while between 2002-2006 period Citi had annual pre-tax profits of at least US$20bn, this got wiped out by the recent losses.

Err so will this “30-yr” investment be around in 30 yrs time, let alone make money for GIC, as MM predicted? Remember Temasek cut loss on its Merrill Lynch investment, after doubling down, and juz before market turned.

Norges Bank governor Svein Gjedremwas in Singapore to open an office of the central bank unit that runs the Norwegian SWF. It is the fourth office outside Oslo after London, New York and Shanghai. It will have 10 staff in Singapore to manage a portfolio of about US$1.5 billion in assets.

He said in a lecture at the Singapore Management Universit he was looking for an opportunity to work with one of Singapore’s two sovereign funds, the Government Investment Corp of Singapore, to develop investment strategies for Singapore and elsewhere, according to BT.

Hmm, is Temasek too cowboyish for him? GIC came out ahead on its Citi investment,and while UBS is still an investment that lost value, UBS is still around, unlike Merrill Lynch where Temasek doubled down its bet. and Temasek cut its losses on Barclays, and BoA (the buyer of ML), just before markets turned?

When GIC and Temasek did the mega banking (UBS, Merrill Lynch, Citi) deals in late 2007, early 2008, they faced competition for these investments. UBS shareholders were even upset that UBS did not call for a rights issue because they tot GIC had got a sweet-heart deal. So did GIC when it (and many other reputable investors) funded the purchase of rent-control premises in New York. We know what happened there.

Despite having a lot more money (derived from oil and not the savings and hard work of the people), Qatar was a lot more cautious than GIC, Temasek and to be fair to our SWFs, other Arab SWFs, not to say the Chinese SWFs. Only the Norwegians may have been more cautious.

So last yr, as Qatar’s Sandhurst-educated ruler, Sheikh Hamad bin Khalifa al-Thani, put it last year: “With the current crisis, many countries prefer to keep their money instead of investing it abroad. For us, though, this is an opportunity that will not be repeated in the next 20 years.”

Maybe we need FTs who are patient to advise us. Not FTs who are like us: impatient to get things done.

Oh and in October 2009 Qatar Investment Authority made a £600m profit on the exercise and sale of Barclays warrants, while retaining the other half of these instruments plus a direct 7% shareholding in Barclays. They made the investment in late 2008 and must have felt sick when in January 2009, when Barclays’ share price fell to 50p. Shortly thereafter Temasek exited from its Barclays investment made in 2007. To this day, no-one is sure how much it lost.

But all those who castigate Temasek and GIC (e.g.websites allied to Dr Chee and his SDP) for not being transparent should note that the Qatar Investment Authority does not publish an annual report.

BTW, this lady has no MBA, she dropped out of uni. But she advises the Qataris. A lesson for our SWFs?

As the row between Fortis and Khanazah over control over Parkway is starting to sound like a row between India and M’sia (bank funding for Fortis seems to be like an all-India line-up); and getting nastier; and since GIC has MM, PM finance minister, trade minister and an ex-DPM as directors (the last an executive director); and as S’pore is trying to settle a long-standing row with M’sia over some land, perhaps GIC decided that it had better not get caught up in India v M’sia.

Update 26 June 2010

‘GIC remains committed to Fortis through our substantial investment in Fortis’ convertible bonds. Like any other major investor, we constantly review our investments and will evaluate participating in the larger fund raising . . . and defer the current preferential investment until such time,’ GIC said in a statement released by Fortis to the Bombay Stock Exchange.

GIC currently has a 6.58 per cent interest in Fortis.

‘Fortis acknowledges the patronage of GIC and believes this development will be a better strategy for the company,’ the Indian group said.

Except from BT

*Who they? Run by two ex-local MSM journalists (considered by other journalists as smart and idealistic), one gets the impression that they are aiming to be a corporate version of Temasek Review without TR’s anti-government stance, inaccuracies, and misreps. Update: they even use the moniker “admin” to sign-off pieces: like TR.

Switzerland yesterday ended months of uncertainty after the country’s parliament finally approved legislation allowing the transfer of 4,450 names of American clients suspected of evading taxes to be passed to the US authorities.

The decision followed days of parliamentary squabbles that threatened to delay the treaty.

Switzerland promised to deliver the names by August 19. A failure could have prompted US legal action against UBS, destroying shareholder value.

The Swiss upper house on Wednesday rejected the idea of a popular referendum to decide on the UBS client data deal, putting it at loggerheads with the lower chamber and casting doubt on how Bern will keep its promises to Washington.

Reminder: So long as the deal is not approved, the danger is that the US may decide to prosecute UBS for helping its US clients evade taxes. This could destroy UBS .

As MM is among Time’s 100 world’s influential people and ST is forever playing up his influence with US policy makers and as he is chairman of GIC, shouldn’t he be calling the US president? The US has an interest in S’pore’s continued stability under the present government.

Once a company gets very large, its growth rate inevitably slows. Its success will have attracted admirers, inflating its valuation. And then there is “tall poppy” syndrome, the tendency for the leading company in an industry (Goldman Sachs, Microsoft) to be the subject of political and regulatory attack.

Rob Arnott of Research Affliiates has quantified this process. He looked at the Wall Street sectors between 1952 and 2009 and saw how the leading stock in the sector performed over subsequent one, three, five and 10 year periods. On average, the tall poppies underperfomed by 3-4 percentage points a year. Getting exposure to a sector by choosing its largest component is thus the quick route to underperformance. Interestingly, Mr Arnott found the performance was worse when government spending is rising; suggesting that active govcerment means more regulation which means bad news for the big stocks.

Given that sector leaders comprise around one-quarter of the market value of the Russell 1000, that means investors could outperform by almost a percentage point a year by owning the entire sector minus its leader.

“Korea’s total foreign exchange reserves are about $280bn so it is only putting about 10 per cent into KIC*,” says Mr Kalb**. “Compare that with Singapore where the central bank keeps $150bn in liquid reserves and yet [of the country’s two SWFs] GIC is tasked with managing $250bn and Temasek $100bn.” $ = US$

Some state pensionplans have not adjusted their risk premium either since the financial crisis. They expect their equity portfolios to earn them more than 8% per year, a risk premium a bit larger than 5%. The state plans also have no incentive to lower their equity premium. If they do, their projected assets will fall and liabilities will rise. This means their funding ratios will plummet and they will have to start making larger contributions to the plan, which would likely mean higher taxes.

(Taken from link in previous post)

Our MPs should be asking if Temasek’s and GIC have adjusted their risk premiums. Remember the constitution has been changed to allow more of the returns from reserves to be used. Somehow I feel the people-in-blue will be the men-in -white clones on this issue. And our NMPs will not take up the slack. Miss Siew Kum Hong. Feminists and GLBT, you people shouldn’t have made him yr poster boy. As for PAP MPs, what would you do to a dog that bites the hand that feed him or her unprovoked? Yes shoot the dog.

No not our local MSM admitting that Temasek and GIC goofed badly. Remember the media orgasms when the chumps (sorry champs) bot into Merrill Lynch, UBS and Citi?

Several of the investors that spotted early the opportunities the subprime market offered, then started buying US banks early last year when Temasek was selling BOA and Barclays, now are looking fallible.

If I were carrying an ad for GIC and Temasek (I’m not, but wish I were) it would be, “The line between success and failure is very thin.”

RiskMetrics, an international share proxy advisory service, issued a critical assessment of the AIA takeover bid, saying while a deal had “a sensible strategic rationale”, Prudential was paying a heavy price.

FT reported that RiskMetrics said Prudential was paying US$35.5bn for a company with US$1.6bn in post-tax operating profits.

“For this to work, profits have to grow substantially beyond the expected cost synergies. Our analysis indicates that Prudential needs very high growth rates at AIA to only meet a reasonable return on invested capital, something that seems a stretch when managing a difficult integration process.”

Let me know when our local media report this story.

BTW GIC’s interest in this stock shows that its analysis is different: it is willing to forgo jam today for jam tomorrow (maybe). Hmm must be MM’s 30-yr view at work. Wonder who is right. Remember shortly after he last said this , Temasek sold its BOA stock, just before the market recovered. GIC held on to its UBS and Citi investments.

A new person helps, after a bad performance patch, even if the those replaced cannot be faulted.

Ahmad al-Sayed became chief executive of Qatar Holding in October 2008. And it has tried to take advantage of the financial crisis by picking up stakes in Barclays, Credit Suisse, Porsche, Volkswagen and Canary Wharf Group. And now buying the whole of Harrods.

Qatar Holding is the prime vehicle for strategic and direct investments by Qatar and is a division of the Qatar Investment Authority, founded in 2005 to diversify the emirate’s assets away from oil and gas.

What the Qataris are planning to do with Harrods shows an “adding value” mindset, rather than a passive attitude

FT reports: Qatar Holding is considering whether to launch a flagship Harrods outlet in Shanghai following its £1.5bn purchase of the London department store this weekend.

Trying to replicate the success of Harrods’ Knightsbridge store overseas is one of four areas now up for discussion as part of Qatar Holding’s three-month strategic review of the business.

Ahmad al-Sayed, chief executive of Qatar Holding, will also investigate developing a luxury online store, expanding the Harrods brand beyond teddy bears and souvenirs for the mass market, and giving the London flagship store a makeover in order to expand the selling space.

Of course owning all of a private investment helps. Maybe Temasek should be more aggressive in pursuing non-listed companies.

Ahmad al-Sayed, chief executive of Qatar Holding, told the Financial Times that the acquisition of Harrods was part of a strategy to acquire “prestigious top-performing businesses and to buy them at the right point in the cycle”.

Qatar Holding is the primary vehicle for Qater’s strategic and direct investments. It is an arm of Qatar Investment Authority (QIA), which was founded in 2005 to strengthen its economy by diversifying into new asset classes.

Temasek’s investment strategy centres around four themes:

• Transforming Economies

– We invest in industry sectors that correlate with the economic transformation of the country

• Growing Middle Income Populations

– We find opportunities in companies and industries whose growth is fuelled by the increasing purchasing power of middle income populations

• Deepening Comparative Advantages

– We tap the potential of competitively-positioned companies

• Emerging Champions

– We identify companies proving to be best-in-class, be it regionally or globally.

GIC simply says, The group strives to achieve good long-term returns on assets under our management, to preserve and enhance Singapore’s reserves.

Note nothing about trying to time investments. Maybe thaz why they messed up big-time on Merrill Lynch, Citi and UBS. Even MM admitted that much saying they went into too early into financials.

Now Qatar’s track record is not that great either: but at least it sets out a benchmark on which it can be judged.And it shows it is aware of the importance of timing.

In the mid-nineties, Yahoo! tried to figure this [what web search is] out by asking of every website “where does this belong?” They created categories, then had an actual live human look at each site and make a judgment, like a librarian. … But the web grew exponentially, and there weren’t exponentially more librarians for hire. Google beat Yahoo! by asking a different question: instead of “where does this belong”, they asked “who linked here?” A link became a proxy for a human decision; to link to something is to decide that it’s in some way relevant. Google reads links as human intent i.e. web search is an attempt to figure out what people want, not what librarians say where something belongs.

So in investing prior to and during the recent crisis, Buffett (“Is there value?”), Paulson (“Is sub-prime over-valued”) asked the right questions, GIC, Temasek and many others didn’t.

Buffett has a big stake in Goldman Sachs and the recent problems there had “experts” saying that he must have lost serious money. But no: the fall is gd for him, “Heads he wins, tails he still wins”.

FT reports:

In a surprising turn however, Mr Buffett, also explained that the travails at Goldman had been specific net positive for Berkshire, which bought $5bn of preferred shares paying a 10 per cent coupon at the heart of the credit crisis when Goldman was in need of additional funds.

Despite the roller coaster share price ride, Mr Buffett said that the headline challenges facing Goldman made it less likely that the bank would call its preferred shares. Those earn Berkshire almost $500m a year. If it the shares were called Berkshire would get $5.5bn back, but could only deposit that in low interest accounts earnings less than $20m a year.

“Every day that Goldman does not call our preferred is money in the bank,” Mr Buffett said. “Our preferred is paying $15 per second … so as we sit here… tick tick tick … its $15 in the bank. I don’t want those ticks to go away.”

If only the FTs, scholars and ex-SAF generals were quarter as gd, GIC and Temasek could make better returns, giving government more money to help the needy. They should realise, as FT’s Lex says, Funny how “once in a lifetime” opportunities roll around every few years or so.

Do they even know that, Norway’s finance ministry will tighten risk controls over the country’s sovereign wealth fund but has rejected calls for an end to active management?

The scope for active management of the NKr2,757bn US$456bn) oil fund will be limited after criticism of its performance during the financial crisis.

Norway has been reviewing its investment strategy since the fund lost 23 per cent of its value in 2008, doing worse than the decline in the benchmark portfolio against which it is measured. Initial calls for a shift to passive management have become more muted as the fund recovered most of the previous year’s losses in 2009 and outperformed the benchmark by 4.1 percentage points.

However, the report proposed the scope for active management, measured in terms of expected tracking error from the benchmark, should be reduced from its upper limit of 1.5 percentage points to 1 point.

Other proposals included limits to leverage and tighter regulation of risk concentration.

The fund, officially known as the government pension fund, recorded a return on investment of 25.6 per cent in 2009, the best in its 13-year history, on the back of its worst performance the year before.

As the Norway Fund went into the crisis underweiged equities, it used the opportunity to load up on equities last yr.

Our MPs should be asking ministers why S’pore is not following the Norwegians?

In Marchm Carl Heinz Daube, the head of Germany’s formidable debt management agency, travelled to China and Singapore for a meeting with two of the world’s biggest investors – as part of an attempt to tap a new pool of investors, such as sovereign wealth funds – who might be willing to buy German government bonds.

Sumething that the FT said “that would have seemed almost unimaginable – or unnecessary – five years ago.”

No not execute* the GIC and Temask executives whose judgement lost us billions and made MM look no longer like a sage that he undoubtedly is, but an ordinary mortal that is stupid. He had defended the bank investments saying they were for 30-yrs. Now we know that it might take that long to recoup our principal in UBS; and that Temasek sold out of BoA while a top hedgie was buying.

But he could do something to those who goof up, so that others are more careful of messing-up. Even if those who goofed do not deserve to be punished.

What about caning them? So that the executives in GIC, Temasek , TLCs and GLCs will buck up. My friend heard him say at a lunch some years back of “Lining up some people and giving them six of the best [cane them]”. He was speaking at a lunch in his honour when he last visited KL. My friend was seated beside him, or so my friend claims. But my friend has been known to tell fibs.

If caning sounds outrageous in a civilised place, in the mid-18th century, the British court-martialled and executed an admiral for failing to “do his utmost”. It was meant “to encourage the rest”**. As the admiral executed was the son of an admiral, all naval officers (aristocrats, gentry or upper middle, the lot of them) knew that, if it could happened to a lord and an admiral’s son, it could happen to any of them.

A naval historian wrote that the execution forged “a culture of aggressive determination which set British officers apart from their foreign contemporaries, and which in time gave them a steadily mounting psychological ascendancy”.

For the rest of the 18th century and the whole of the 19th century, Britannia ruled the waves.

BTW the admiral had reason and justice on his side (just like the SWF executives, I’m sure): little gd it did him. And little gd should it do the executives. There are more important things that justice and fair play for individuals when matters of state or profit are concerned.

Hmm, maybe the N Koreans know their British history, better than MM, a Cambridge man.

—

*They executed the finance chief who messed up a currency reform resulting in protests and a climb-down by a government that is usually brutal towards protestors.

** Another reason was to appease public opinion. People were upset that as a result of his actions (very reasonable), a fortress was lost.

Strange because MM Lee said several years back that GIC would not invest in mining entures, because he didn’t understand mining. OK I know he is chairman of GIC but has no post in Temasek but remember Deng Xiao Ping had no official post in the CCP or government when many of the reforms were carried out.

So is Temasek ignoring MM’s sagacity at its, and our peril? Remember a few yrs back, he said SIA shld divest itself of SIA Engr. SIA told the world that SIA Engr and SATS were core to its strategy. Last yr, it divested its stake in SATS via a dividend-in-specie.

Things can go badly wrong, when MM’s sagacity is ignored. Juz like when Temasek divested itself of its BoA stake just as market was turning. Remember MM had defended Temasek’s purchase of Merrill Lynch as one for 30 years. Who was the wiser? MM or the pros at Temasek?

Anyway, don’t the instances where MM is ignored by Temasek and its TLCs show the lie that Dr Chee, his SDP and their local new media and foreign media allies are propogating: that MM is still the puppet master and that the PM and his cabinet his toys.

— It will invest US$100 million in Platmin, a South Africa-based platinum miner. This will be in the form of convertible debt in the company. Temasek can convert all the debt into common shares at US$1.215 or about S$1.70 a piece when it matures on December 31 this year. It will then hold less than 20 percent of shares in Platmin.

*

— Temasek will buy about US$490 million ($685 million) of subscription receipts from Inmet Mining.The Toronto-based diversified miner said Temasek’s Ellington Investments unit will buy some 9.2 million subscription receipts, which will each be bought at about C$54 ($75). Proceeds will be held in escrow pending exchange of the receipts for Inmet common shares. The receipts will be exchanged for the 9.2 million shares, representing a 14.16 per cent stake in Inmet on a non-diluted basis. Inmet will use the money from the deal to develop the Cobre Panama copper project and for general corporate purposes.

His company, BlackRock, controls or monitors more than US$12 trillion (GIC and Temasek have, at best, an estimated US$700 billion), yet he admits he and his team made mistakes during the recent crisis.

“At the mention of these blunders*, Fink, who has been sprawled in his chair, suddenly stiffens. His voice takes on a harsh tone that is leavened only by his visible anxiety. “When you manage money, you are going to make mistakes. You are not going to be 100 percent perfect. Our job is to minimize those problems, to cauterize them,” Fink says, his voice rising. “We’re not perfect, and I’ve never said to anyone that we are going to be perfect. Our investors had all the information we did and they did their own due diligence.” He exhales deeply. “Our real-estate division is struggling because of bad performance, and we’re making changes. I don’t care if the whole industry blew up, our job is to do better than the industry, and we didn’t in real estate,” he says. “I am not making excuses. I lose sleep over these problems.” The Stuyvesant Town loss was “an embarrassment,” he says. Then his voice drops to a whisper. “I mean, my mother gets her pension from calpers.””

If you want to know about one of the heroes of the recent crisis, read this Vanity Fair article. Warning — runs to over eight pages.

*His blunders — “There was the strong backing of Lehman Brothers’ management as the bank was imploding, kicked off by BlackRock’s purchase of a large block of Lehman stock at $28 a share, three months before the firm went bankrupt. And shortly after Bear Stearns collapsed, Fink advised investors to put their money into riskier, high-yield debt, just before that market tanked. BlackRock … also contributed its share to the toxic-asset morass—with close to $8 billion of collateralized-debt-obligation deals that defaulted in 2007 and 2008.”

CIMB is regarded as having overtaken DBS in the race to become a leading bank in the region according to Ranu Dayal of Boston Consulting, BT reported a few days ago, though DBS remains the biggest South-east Asian bank by market capitalisation.

Hey whaz this?

CIMB is from M’sia, a country that is not as meritocratic as S’pore according to the then SM and PM in the 1990s, now MM and SM respectively. While SM cocks things up regularly (for example, in the 1990s and early noughties, when he was PM, S’pore got complacent and productivity fell), MM gets most things right.

So how come CIMB overtakes our national banking champ (err shld it be chump?). Makes me ashamed to be a S’porean. I mean the meritocratic policy is in this region “uniquely S’porean”

Wait a minute, DBS has had Foreign Talents as CEOs and senior executives since the late 1990s. Could this be the problem? The FT policy trumps the meritocratic policy.

I am surprised that anti-government subversives are not using DBS to show up the government. Given the track record of DBS, one could reasonably argue that the FT policy is rubbish — overpaying for Dao Heng so much so that DBS had to take an impairement charge of over S$1 billion; making its Treasured clients (they are only S’poreans, not “countrymen”) poorer (HN5 notes); and running down the expensively acquired POSB brand before realising its potential and spending $ rebuilding the brand.

And the SDP and friends can reasonably cite CapitaLand, another TLC, as an example where FTs are scarce, but where locals do well at managing a TLC. The CEO is a local and so are many senior executves. It is the leading regional property company (by reputation and market cap) and a big player in China. More than can be said of FT-laden, spastic DBS.

Of course, one could argue that there is no casual relationship between bad performance and being FT-laden,and gd performance and being local-led. And that one FT- laden bank does taint other FT-led companies. So look at the other listed TLCs — Keppel, KepLand, SembCorp, SIA, SATS, ST Technologies, SIA Engr, SingTel, Starhub, M1 and NOL. And judge for yrself.

Back to DBS, yesterday BT had an article speculating what the incoming chairman could do for shareholders. Well he could relook the FT policy at DBS: is the policy flawed or just that the wrong FTs were recruited? Too many people from Citi, the bank that the US government had to rescue? As a HSBC shareholder and customer, I can attest to the damage that these ex-Citbankers did before they moved on.

Update on 25 March 2010

Footie fans (FTs and those who hate RI, I assume) insist I post this to show that locals can be as rubbishy as FTs.

Recently The Reform Party’s Sec Gen told Reuters that in the private sector, “heads would have rolled” over the billion dollar losses that Temasek and GIC lost. He should know — he was a hedgie. Of course he did not mean to be taken literally.

Today the NYT reported that there are unconfirmed reports that N Korea’s finance chief had been executed by firing squad. He had been in charge of a currency reform programme that ended up with public protests, and some changes to the programme by the government. Things unknown there.

Executives at Temasek and GIC must be glad that the S’pore government is more tolerant of failure. It also shows that comparisons between the two governments are wrong. LKY is right when he says that it is wrong to compare the two countries.

Oh dear. “The Swiss banking giant UBS has stepped up its lobbying to pass a treaty with the United States that would resolve a dispute over tax-evading clients, amid signs that the deal is running into trouble in [the Swiss] Parliament,” NYT. Reminder: if the US goes after UBS, UBS could go the way of Arthur Anderssen, the auditing firm that died because of its misdeeds. Then we might never recover our investment.

Looks like UBS is becoming GIC’s Shin — the losses, fallout and bad publicity of this investment (like Shin for Temasek) go on and on.

The latest on Shin is that Thai Prime Minister Abhisit Vejjajiva has appeared on national television to reject a demand from demonstrators that he resign by midday and call elections. In response the demonstrators are stepping up the tempo. So far, there is no violence.

In the US, there is growing concern that public pension funds are taking excessive risk to meet their targeted returns. —NYT article.

Our MPs should be asking ministers about the risks our SWFs are taking relative to their returns, not easily batted away questions on losses. In the context of the portfolios, the losses are as Mrs SM could have said (but didn’t),”Peanuts”, and as any CFAer could tell you, “Look at total portfolio return, not individual items”.

And asking if they are aware that Norway’s SWF commissioned a report by three business-school academics—Andrew Ang, William Goetzmann and Stephen Schaefer from Columbia, Yale and London respectively – that found that taking the recent crash into account, the fund’s performance was essentially indistinguishable from that of a passively managed index fund.

And what is the experience of Temasek and GIC in this passive versus active debate.

I don’t expect PAP MPs (hey they can be disciplined for being difficult and anyway there is such a thing as loyalty) or Chiam (he is sick) to make life difficult for ministers. But where is Low (Waiting for pension?), or Sylvia (Waiting to be given Low’s seat?); and NMPs for?

Or for that matter the SDP? I don’t incude RP or KJ because to do the economic analysis they are doing (and put it into understandable language) is not easy, so let’s cut them some slack.

Miss Siew Kum Hong. His ideas of human rights did not only encompass gay and feminist issues like “anal sex is OK”, but also, what the Chinese Communist Party rightly includes as a human right, “economic rights”. He gave a great speech on CPF and asked the right qns on our SWFs.

US hanging tough, playing rough,unwilling to re-enter talks to alter the deal struck with Switzerland to end a damaging tax case against UBS, the U.S. ambassador in Bern was quoted saying in a Swiss Sunday paper.

The bad news, that you may have missed, is that outflows from UBS’s wealth management and Swiss banking operations nearly doubled to SFr33bn compared with the previous quarter, and SFr12bn flowed out from the US wealth business. Like their rival Credit Suisse, and the smaller Swiss private banks, wealth management and Swiss banking operations are at the heart of UBS’s operations and profitability.

The ongoing problems with the US tax authorities are not going to help staunch the outflow in these areas. The US accused UBS of hiding nearly US$15bn in assets of US customers, and is seeking the account details of some of UBS’s US clients.

For what its worth, UBS said they were confident that the long-running dispute with US tax authorities would be resolved.

Wondering why I blog so much on UBS? Two reasons.

One, is that UBS are a fascinating case study in what can go wrong in a super blue chip. When S’pore Inc bought into Merrill Lynch, Citi and UBS, I had concerns about the investments in the first two. But UBS? Tot it was a no-brainer, dunk slam investment.

The other is that GIC manage our reserves: this is one major balls-up.

Great time for UBS’s survival to be questioned, when bonds held by GIC must be converted into UBS shares by 5 March, 2010.

[Reminder: In December 2007, GIC invested 11 billion Swiss Francs for these bonds that would give it 9% of UBS. It later had to invest an undisclosed amount to prevent a dilution of its stake when UBS called for a rights issue to cover mounting losses. Later the Swiss government had to take a 9% stake to cover yet more losses.]

Last August, it was feared that UBS would not survive if it were indicted in the United States for failing to provide details of tax evasion by US citizens (Note the concern abt UBS not surviving the indictment was not reported here: both in MSM amd bloggers). Its failure could have undermined Switzerland’s economy. And of course Singapore’s reserves.

Now: “The Swiss government on Wednesday backed off an agreement with the United States that required it to hand over the names of wealthy American clients of the Swiss bank UBS who were suspected of tax evasion.

‘The announcement, which came after two Swiss courts ruled that the disclosure of client names would be illegal because it would violate the country’s secrecy laws, threatened to open a new front in the investigation into UBS by the Justice Department.

‘While the Swiss cabinet … would continue talks with the United States on the matter … there was a risk that the United States would resume civil proceedings filed against UBS in a Florida court last year. That case sought to force UBS to disclose the names of 52,000 wealthy American clients suspected of tax evasion through UBS’s private bank.

‘That lawsuit was suspended in August when the Swiss government, acting on behalf of UBS during months of intense negotiations, promised to hand over 4,450 UBS client names.” Full article

So if no new settlement is reached, UBS can be indicted again. And the issue of whether it can survive will again be asked.

This is one jinked investment. Time for MM (GIC’s chairman) or Tony Tan (executive director) to go an visit some holy man to ask for the bad luck to go away?

According to aNYT article, GIC may have invested US$100m more than our MSM reported.

“The Government of Singapore Investment Corporation, which made a $575 million secondary loan, and invested as much as $200 million in equity [note ST etc report this as US$100m: 100% less], stands to lose all of that.”

But to be fair to GIC, in the immortal words of the character Chuck (played by Steve McQueen) in the Magnificent 7, “It seemed a good idea at the time”, when the seven cowboys realised they were up against an army of Mexican bandits.

“At the time, it looked like a sound investment,” said Clark McKinley, a spokesman for Calpers, the giant California public employees’ pension fund, which bought a $500 million stake in the property. “When the market tanked, we got caught.”

‘”Many of the other companies, banks, countries and pension funds — including the government of Singapore, the Church of England, the Manhattan real estate concern SL Green, and Fortress Investment Groups — that invested billions of dollars in the 2006 deal stand to lose their entire stake.”

‘This month, several of the secondary lenders sent letters to Tishman Speyer and BlackRock threatening foreclosure because of the default. The partners tried unsuccessfully to craft a new deal that would have involved them putting up “several hundred million dollars,” in return for restructuring the loans, according to one real estate executive briefed on the negotiations.”

Note GIC is one of the secondary lenders but it is not yet known if it was one the u/m poker players.

“The secondary lenders, he said, had “overplayed their hand” in the hope that they would get back some of their investment. Instead of being forced into bankruptcy, Tishman Speyer and BlackRock will walk away sometime after a new manager is in place.

‘This month, several of the secondary lenders sent letters to Tishman Speyer and BlackRock threatening foreclosure because of the default. The partners tried unsuccessfully to craft a new deal that would have involved them putting up “several hundred million dollars,” in return for restructuring the loans, according to one real estate executive briefed on the negotiations.”

“Anybody who bought property in the last six years has their equity pretty well washed out,” said Ray Torto, chief economist at CB Richard Ellis, a real estate firm. “People are looking back on that period as the peak of the madness, the bubble. The expectation was that there was always someone who would pay a higher price after you,” part of an article about the promoter of the investment that lost GIC about US$675 million.

“Instead of rents and values rising unchecked, the value of commercial office buildings in the United States has dropped 43 percent, on average, since November 2007, according to economists’ estimates. If unemployment continues to rise, an ugly situation could turn nightmarish,” it continues.

As to the promoter,

“Tishman Speyer, which has no corporate debt, earns fees for developing and operating the buildings but usually puts little of its own money into a deal … In the $5.4 billion Stuyvesant Town deal, for instance, BlackRock and Tishman Speyer invested only $112 million each of their own money, which they have written off … Tishman Speyer took $18 million a year in fees; company executives say they began waiving the fees in fall 2008.”

Maybe it is time to buy the banks? Like John Paulson who is long BoA (Remember he correctly predicted the sub-prime credit crisis in 2007. That reaped him a US$3 billion profit.)

In a story fromFortune: “The next wave of sovereign wealth fund investments is likely to look very different from the flurry that occurred before the crisis. For one, the funds have drastically cut back on banking assets. Just 16% of the deals they made this year involved the financial sector, down from 48% in 2008, according to Barclays data. (Remember Temasek’s and GIC’s investments in Merrill Lynch (BoA), Barclays and UBS; and Temasek’s sales of BoA and Barclays. GIC only made wagga($) on Citi and it could get diluted there on its remaining holdings.)

And short or sell natural resources.

“Meanwhile, including China Development Bank, which received a capital boost from China Investment Corp., more than 50% of sovereign wealth funds’ investments were in the natural resources sector, up from a mere 8% the year before. Huey Evans points to the Chinese government’s investments in Rosneft and Petrobras (PZE), oil companies that agreed to send the country fuel in exchange for loans.”

“If Singaporeans are not “hard-driving and hard-striving”, where did GIC and Temasek get so much money to lose?”: a posting on a Temasek Review article.

Not quite correct because the money that GIC and Temasek invest comes from government surpluses. As about 43% of Singaporeans don’t pay income tax, this means that the surpluses are generated by being thrifty (government’s view) or mean (view of many netizens).

Economists in the private sector, and the Reform Party (the sec-gen was once an economist and he has a first-class degree from Cambridge) have argued that rather than accumulate large surpluses that are then invested abroad, the government should spend more building up Singapore’s human capital. By spending more on things like education, healthcare and consumer protection, the returns generated will be better than the returns on overseas investments.

This is an argument that has excellent academic credentials. China is often asked by eminent economists ,”Why do you export so much when you, in return, use the surplus lend to the Americans so that they can buy more from you?” The economists advise that China should invest more locally.

Now MM Lee’s view is that Singapore needs the reserves should anything go badly wrong. He could have quoted the example of Kuwait, which surprising he has not. When Kuwait was invaded by Iraq, the reserves were used to help pay for the war. And afterwards for the reconstruction of the country. He could have cited Iceland and Dubai (which again he hasn’t) as countries that got into trouble because they ran out of $.

BTW, one noted local economist has said that the government is effectively pocketing the difference between the returns it gets from investing abroad and the returns it pays on our CPF accounts: a carry trade arbitrage. Borrow low and invest for higher returns.

For the technically minded, our CPF monies are invested in special government bonds. The $ from the bonds flow into the government’s Consolidated Fund together with revenues from taxes etc. All government expenses are paid out from this fund. If there is a surplus (as there usually is) part of that can go to GIC and Temasek. The government argues that because all the monies in the fund is fungible (cannot be separated), one is wrong to argue that CPF monies are invested abroad.

Technically the government is correct, but so what is the retort? The financial effect is the same as if our CPF monies are invested abroad.

Finally, Singapore is unique among the countries with the largest sovereign wealth funds. The other SWFs are effectively funded from oil revenues. In the case of Singapore, it could be reasonably argued, by government critics, that the funding results from the “hard-driving and hard-striving” Singaporeans who are forced to save, and from less than optimal government spending.

So the quote at the beginning of this piece has elements of the truth.

“A study by Standard & Poor’s, one of the world’s leading credit rating agencies, has raised questions over the financial strength of some of the biggest banks ahead of new rules that could require them to raise more funds.

‘The analysis by S&P showed that HSBC is the best capitalised bank in the world, while Switzerland’s UBS, Citigroup of the US and several of Japan’s biggest banks are among the weakest.”: an excerpt from the FT.

No the purpose is not to show that highly paid managers at GIC goffed, or how smart I am. I have been a shareholder of HSBC since the 1980s. Even during Green’s (Christian + McKinsey, a lethal combination that always leads to problems) tenure as CEO, I kept the faith.

Now that the CEO is a man who joined the bank as an International Officer from a minor public school with I think A-levels, and he is basing himself in HK, one can only expect the return to the values that made HSBC great during the tenures of Sandberg, Purvis and Bond. Oh Purvis won the Military Cross in Korea, when he disobeyed orders to withdraw. He claimed he couldn’t hear the radio messge.

Sorry I am digressing. When Temasek bought into Merrill Lynch and Barclays and GIC into UBS and Citi, I realised that they were buying into highly efficient banking machines. There was just enough capital for regulatory reasons and to provide a buffer for some things going wrong. They needed a bit more cushion and GIC, Temasek were providing it. Risky but history was on their side.

When the world recovered from the credit crunch of 2006, 2007, GIC and Temasek would reap the rewards of these finely tuned cash machines. They were the equivalent of the best of the best F1 cars. I thought we had smart boys and gals. And that the risk would pay off.

But then came Bear Sterns, Lehman Brothers and AIG, and the rules changed. The winners were the better capitalised banks. If HSBC had as little capital as Citi, I’d be a poor man. The amounts it had to write-off on US sub prime would have shmed Citi. But it had capital.

“Analysts at Credit Suisse reckon that even though UBS will not be able to pay any dividends for the next few years, its shares are so cheap relative to the aggressive profit-targets that it has announced that they are a “free option” on a revival of the investment bank.” : Economist.

The issue is will the Swiss regulators allow the bank to expand as aggressively as it wants t,o especially as Switzerland had to rescue the bank. Albeit the Swiss government made a good profit.

Readers may remember that GIC first bought into UBS in December 2007 and has been sitting on a loss ever since then.

When Temasek and GIC first bought big stakes in Merrill Lynch and Citi respectively, some analysts (self-included) were wondering where was Warren Buffett? Surely these banks would have tried him first? And if he passed, what did it mean? Was he giving banks a miss because they were offering him bad terms (he has a reputation of demanding and getting great terms: Goldman Sachs is a gd example) or did he have other issues?

Since then the world has witnesses the deaths of Lehman and AIG, and a shakeup in the financial industry. And Buffett buying.

Not only that, but he is borrowing half of the $16 billion in cash Berkshire plans to use for the Burlington deal, his latest.

So it is interesting to note that Temasek returned to the bond market for the second time this year to raise US$500 million ($692 million) via a 30-year issue. This issue follows a US$1.5 billion 10-year bond in October and a US$1.75 billion 10-year paper in Sept 2005.